Fixed Income Mix

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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soldToSoon
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Fixed Income Mix

Post by soldToSoon »

Thanks for the continued critique of basic investment questions. I've to deploy about 2 million in fixed income to serve as my core fixed income component.
I could go 100% corporate plus provincial plus gics. I'll end up with about 3.25 to 3.75% yield depending on the duration of between 10 and 15 years. But then I'm susceptible to interest rate risk.
If I add 50% preferred shares to the mix, especially the rate resets of high quality, my interest rate risk is mitigated.
The preferred shares have credit and market risk while bonds have interest risk.
What else am I missing here?
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kcowan
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Re: Fixed Income Mix

Post by kcowan »

Bonds are pretty simple as long as you stick to blue chips. Prefs have the complication of rate resets and callable factors, both of which expose them to more interest rate risk. Read prefblog.com to gain a deep understanding.
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Re: Fixed Income Mix

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If your fixed income (bond ETF) investment is in a non-registered (i.e. taxable) account, pay attention to the difference between yield to maturity and average coupon. The bigger the difference, the more tax inefficient the ETF is (decreasing the after-tax yield). GICs which are priced at par do not have this problem. BMO has a bond ETF (ZDB) which is designed to avoid the problem.
2of3aintbad
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Re: Fixed Income Mix

Post by 2of3aintbad »

With all due respect, if you have 2 Million Dollars to invest in fixed income, do you really think that this, or any, online forum is the best place to get advice? Perhaps you can afford advice from a professional
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Re: Fixed Income Mix

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2of3aintbad wrote:With all due respect, if you have 2 Million Dollars to invest in fixed income, do you really think that this, or any, online forum is the best place to get advice? Perhaps you can afford advice from a professional
So if he only have a 1 million would that make it ok ? or $500,000 or ........
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adrian2
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Re: Fixed Income Mix

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Ron Mann wrote:If your fixed income (bond ETF) investment is in a non-registered (i.e. taxable) account, pay attention to the difference between yield to maturity and average coupon. The bigger the difference, the more tax inefficient the ETF is (decreasing the after-tax yield).
You're over-simplifying how a bond ETF works. The reality is somewhat different.
Hint: riding the yield curve.
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ghariton
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Re: Fixed Income Mix

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2of3aintbad wrote:With all due respect, if you have 2 Million Dollars to invest in fixed income, do you really think that this, or any, online forum is the best place to get advice? Perhaps you can afford advice from a professional
In my humble experience, the advice you get here is as good as, and quite often better than, you get from professional financial advisers. Yes, there are some very good ones out there, but there are some awful ones too. Without doing a systematic study, I get the impression that most are mediocre. And in general, it is difficult to know ahead of time which is which.

That doesn't apply to specialized advices on taxes, wills and estates, incorporations, and so on. But for general financial advice? This site does better than any advisor I've ever run across.

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soldToSoon
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Re: Fixed Income Mix

Post by soldToSoon »

Thanks for the responses so far.
I do appreciate your inputs.
Regarding seeking professional advice. I do have a few high profile advisors from big banks recommending portfolio allocations to me. But personally, how do I know that there recommendations are in my best interest? Ultimately, most investment advisors are salespeople and they want to get their big commissions.
If I don't know much about investment world and don't show any inclination to learn, am I not going to become a 'victim'?

And I concur with some of the members here, this forum is amongst the better ones.

I have read a lot about investing in the last few months, sometimes reading books on bonds cover to cover non stop. But there are likely to be many blindspots in my nascent developed understanding. And that's why I come here- to learn from more experience members and seek their wisdom.
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AltaRed
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Re: Fixed Income Mix

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Advisors from the big banks are going to sell you products with substantial ongoing costs, e.g. mtual funds with MERs, or managed portfolios with advisory fees, etc. For large accounts at a bank, you do want to stay away from mutual funds, even index ones. The managed portfolios are likely better since the fee schedule comes down for large accounts. You should be able to get the advisory fee down to 1% or less for a multi-million account BUT think about paying 1% on $2 million every year. You can do better with a DIY portfolio based on Couch Potato (2-4 ETFs) with underlying MERs less than 25bp (0.25%).

If you are uncomfortable after reading about Couch Potato porffolios on our own finiki site, or on the Couch Potato site, then you are not cut out for DIY and should consider a managed portfolio option (not managed payout solution) with one of the big banks. I only have knowledge of the RBC ones since relatives of mine are in those.

An example here http://funds.rbcgam.com/pdf/mp/rbcmp_pr ... nced_e.pdf which is one of the 6 selections here http://funds.rbcgam.com/pdf/mp/rbcmp_performance_e.pdf
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8Toretirement
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Re: Fixed Income Mix

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For fixed income I would be concerned about asset preservation. I would use GIC's for FI. Bonds and Preferred shares are susceptible to large losses in a rising rate environment, especially from these levels. Depending on your age and asset allocation these potential losses can outweigh the benefits of a slightly higher rate by a significant margin.

FI is for safety. Use other assets for portfolio growth.
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Re: Fixed Income Mix

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FI is for safety. Use other assets for portfolio growth.
I thought the meaning of Risk Parity is when you try to spread the risk across more asset groups. So if you take slightly more risk on the FI side you can lower your equity allocation. With a certain amount of risk spread across the whole portfolio (some sort of risk budget) same return less volatility?
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AltaRed
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Re: Fixed Income Mix

Post by AltaRed »

Given the OP isn't exactly a seasoned veteran yet in investing, I'd keep it simple with a bond ladder or a medium term bond ETF. There just is not enough interest rate risk for bonds held over the long term (>10 years) IF the OP sticks with something like VAB or XBB, or an average bond duration of 7-8 years.
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Re: Fixed Income Mix

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8Toretirement wrote:For fixed income I would be concerned about asset preservation. I would use GIC's for FI. Bonds and Preferred shares are susceptible to large losses in a rising rate environment, especially from these levels. Depending on your age and asset allocation these potential losses can outweigh the benefits of a slightly higher rate by a significant margin.

FI is for safety. Use other assets for portfolio growth.
I agree with GICs for FI in a taxable account; I like the simplicity in accounting. The only hassle is, with a large FI portfolio, that's a lot different issuers the OP would have to keep finding to stay under the $100,000 CDIC coverage limit.
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AltaRed
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Re: Fixed Income Mix

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In most cases, there is no reason NOT to go above $100k. I've been above $100k in the past with no concerns whatsoever. It is only the second tier of financials/lenders where I wouldn't go above $100k.
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